The UK tax system is in need of major structural reform if it is
to meet the challenges of the future, says a new report by the
Institute for Government.
and , the two candidates in the race
to become the next Prime Minister, have proposed tax cuts - but
neither has proposed the structural tax reforms needed to meet
growing public spending pressures and changes in the economy.
Published today, ‘Taxing Times’
shows that growing public spending pressures and declining
revenues pose a stark choice to future prime ministers and
governments: without raising taxes or borrowing more, the scale
or scope of public services will need to shrink. Our flawed tax
system makes it harder to address this choice and calls out for
reform.
This IfG report outlines the growing need to reform the UK tax
system. It is part of a new Institute for Government project
examining the barriers to tax reform and how they can be
overcome.
Our main conclusions include:
- Decades of piecemeal
changes to the tax system have left it complicated, inefficient
and beset with perverse incentives that do little to raise
revenue or meet the Government’s wider economic
objectives.
- Public finances will
come under increasing strain in the coming years – stretching the
tax system and creating pressure to raise revenues.
- The UK’s ageing
population will increase demand for spending on health, adult
social care and pensions. Where future governments meet these
demands without raising tax revenues or borrowing as a share of
national income, spending on education, policing and defence
would have to halve in size as a share of the UK economy over the
next 50 years.
- Existing tax bases are
being undermined by technological and behavioural change. In
particular, the rise of fuel-efficient and electric vehicles and
a reduction in smoking mean the Government will receive around
£10 billion/year less revenue from fuel and tobacco duties by
2030/31 in today’s terms.
- The growth of lightly
taxed activities is also threatening tax revenues.
Self-employment and company owner-management, which are more
lightly taxed than employment, have accounted for nearly
one-third of workforce growth in the last decade.
- The dual challenges of
growing public spending pressures and declining revenues mean
future governments will face a stark choice: raise more revenue
through taxation or additional borrowing, or reduce the scope and
scale of public services.
- Our flawed tax
system makes addressing these challenges more difficult.
Sensible, principled reforms to the tax system could allow
governments to raise revenues with fewer detrimental side
effects, render the system more resilient to economic changes and
ensure it is better placed to help meet the fiscal challenges
ahead. Such reforms could be implemented alongside any
government’s distributional or wider economic objectives.
Joe Marshall, Researcher at the Institute for Government and
author of the report said: “It is not only the amount of tax
revenue raised that matters. How it is raised is also important.
Politicians of all political stripes must start thinking
seriously – and speaking openly – about the need for tax reform
and how they can help overcome the barriers that stand in the way
of change.”
Bronwen Maddox, Director of the Institute for Government, said:
“Successive administrations have taken tax policy for granted.
Given these changes – entirely foreseeable ones – are underway,
we need to start taking tax policy seriously.”
The full report can be found here: https://www.instituteforgovernment.org.uk/publications/
